Last month, Angela Rayner resigned her plumb job as deputy prime minister. She’ll also need to make good on the £40,000 she underpaid in stamp duty on a £800,000 flat. It looks like she got the wrong tax advice, or didn’t follow it properly. That’s an expensive thing to get wrong. Ouch.
To be charitable, these things are complicated. But the story made us think about situations we sometimes come across at Merlin. Situations where clients have picked up financial advice from friends and neighbours. Advice like this usually comes with the best intentions…and sometimes from the local pub.
It pays to be a bit sceptical about this popular wisdom. Do a bit of double-checking first, however believable these claims seem to be. After all, the world is full of banana skins – and well-meaning Del Boys.
Here are five examples of some dodgy advice you might come across in the Nag’s Head. See if you can spot what’s wrong with them, and why.
“Don’t worry about HMRC. Just hire an accountant and you’re no longer on the hook.”
Of course, we support every reason to use an accountant, real or imagined! Sadly though, this advice is a myth. While it’s tempting to believe that your responsibilities can be passed on, it’s not true. HMRC always holds you, the business owner, accountable. It doesn’t matter who prepares the paperwork. We can provide expert guidance and act as your trusted agent. But you must still review returns, keep good records, and check submissions are on time.
“You can forget about VAT, ‘cos you’re under the threshold.”
Many small business owners are told that VAT only matters once turnover hits £90,000. That’s not always true. Remember that registering for VAT also means you can claim it back on purchases and expenses. If you’re expecting to grow quickly, voluntary registration can prevent issues when you cross the threshold at a later date. In some sectors, being VAT-registered counts towards your credibility. It can make your business look more established and professional to suppliers, lenders, and customers.
“Want to avoid National Insurance? Just pay yourself in dividends.”
Well yes, some people can skip a salary and take only dividends. A novice first-time company director might do this, withdrawing all their profits this way ‘to save money’. However, there’s something else to take into account. Without paying yourself at least a small salary, you won’t build qualifying years toward the state pension. So in our experience, a balanced mix of salary and dividends is usually the most tax-efficient way of doing things. If you’re not sure, just ask.
“Don’t forget – all your business expenses are deductible.”
This one’s a common myth. However, HMRC rules require costs to be incurred ‘wholly and exclusively’ for business. For example, a freelance website designer might think they can claim their weekly food shop because they work from home. But that’s mixing personal and business expenses, so it risks penalties if HMRC asks questions. The designer could obviously claim software subscriptions or office stationery as a cost of doing business. Their lunchtime Deliveroo, however, is a different matter.
“Cash-in-hand doesn’t need to be declared.”
If I’m paid in cash, HMRC won’t notice it, right? At a low level, that may be true. Although earlier this year, the National Crime Agency raided hundreds of cash-rich businesses like barbershops and nail bars. We heard about arrests where inspectors compared takings to customer numbers they’d been tracking. They also used tip-offs to spot undeclared income. So don’t forget: all income, whether cash or card, must be declared. Failing to do so risks penalties, interest and even a criminal record.
There are some exceptions…
Let’s not be all doom and gloom, though. Sometimes the bloke down the pub is right. Yes, it’s true that you can reclaim VAT on tea and coffee for the staffroom. Yes, those Premium Bond winnings are tax-free. And yes, lottery winnings aren’t taxable either. (Although you’d pay tax on any later returns from investments.)
Just be careful where you look for advice, and wary of the Del Boys of this world. Always remember those re-assuring words he gave to his younger brother and business partner: “Rodney, everything between you and I is split straight down the middle: 60-40.”
How Merlin can help
To find out more about how we can help your business, please contact us. Our clients say that it’s useful to have a numerate friend prodding their thinking, especially one who understands the issues. If you’re not already a client, please get in touch here. You’ll find us a good fit if you’re looking for an accountant as an investment – rather than just a cost.
